Ethical investing signs of ‘greenwashing’

Green is good, right? As more people bear the consequences of climate change, investor demand for sustainable options is growing. Environmental, social, and governance (ESG) investing is when a fund considers these sustainability factors in their investment strategy. Globally, ESG assets are expected to exceed $US53 trillion by 2025 and represent more than a third of total assets under management.

In Australia, 89% of the investment market are now claiming they invest responsibly. The reality is, only about 40% of the market could be classified as responsibly invested; and, within that segment, only 25% of investment managers are practising a leading responsible approach, according to the Responsible Investment Association of Australasia (RIAA).

The Australian Securities and Investments Commission (ASIC) is concerned about the potential for ‘greenwashing’. This is when a fund claims its product is more sustainable or ethical than it is. A fund may promote itself as avoiding investment in tobacco products, for example. But doesn’t publicise that it may invest in companies that earn up to 20% of their revenue from tobacco products.

To do your best by the planet as well as your own financial future it pays to be aware of signs of greenwashing.

Check the investment product label

There are lots of ways these funds may be labelled. For example, sustainable, ethical, green, environmentally friendly, responsible, conscious or impact investing.  Does the definition they use fit with your understanding of the investment product?

Check the investment strategy

Funds can approach their investment strategy in different ways.

  1. Negative screening

The most common screens are fossil fuels and tobacco but what might be most important to you is a screen for animal cruelty and human rights abuses. So, check the product disclosure statement (PDS), additional information guide, sustainability report, and website for any stated exceptions. If it uses revenue thresholds, check whether it defines revenue; and, if the threshold is clear, when it applies, and any exceptions.

  1. Positive screening

It may invest in renewables, water and energy efficiency, education, and healthcare. Does it explain when an investment is included and is it clear what percentage of the underlying investments are covered by each screen? If the fund discloses underlying investments do these holdings match how the fund screens?

  1. ESG integration 

The most common approach is to consider ESG risks and opportunities at the analysis stage of the investment process. This won’t necessarily prevent a fund investing in a harmful product if the manager thinks the company represents good financial value.

  1. ESG impact investing

If a manager adopts this approach check if the impact investing strategy is defined by the fund. Is it clear which sectors or themes it targets? Does the fund explain how it assesses the potential impact of each underlying investment? Is the manager using their shareholder clout to influence boards and management to achieve better ESG outcomes? This information should be on the fund’s website or in the Product Disclosure Statement (PDS).

The material on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this website is General Advice and does not take into account any person's particular investment objectives, financial situation and particular needs. Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this website are provided for illustrative purposes only. Although every effort has been made to verify the accuracy of the information contained on this website, Infocus, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

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